Pensions: Defined Contribution Plans
By: Source: AARP.org Date Posted: 2005-03-20 12:09:00
Employees can take a more active role in managing their retirement income through a new kind of pension fund. It's called a defined contribution plan.
Both you and your employer can put money into a defined contribution plan. But you are responsible for investing that money during your working years. You can't be sure how much money you'll have in your defined contribution plan by the time you retire. Your retirement benefit will depend on how much you and your employer contributed to the plan. It also will depend on how successful you were in investing the money.
What You Should Know
You take some risks with your retirement income when you have a defined contribution plan. Pay careful attention to where you invest that money.
401(k) Plans
A 401(k) plan is a payroll deduction plan that lets you save a portion of your current salary for retirement. 401(k) plans are "tax deferred." This means you don't pay taxes on the money you put into a 401(k) until you withdraw the money at retirement.
You can invest your 401(k) funds as you see fit. In some cases your company may give you a limited range of investments in which you can place your funds.
Sometimes, your company will match a portion of what you put into a 401(k). It might contribute anywhere from 25 cents to $1 for every $1 that you put into the plan. Employers usually set upper limits on how much they will contribute to a 401(k). In some cases, an employer might put company stock into your 401(k) instead of cash.
403(b) Tax-Deferred Annuities
A 403(b) works like a 401(k). An employee puts money from his or her paycheck into the pension plan. Often, the employer will match this contribution. Only employees of certain nonprofit organizations can contribute to a 403(b). Eligible organizations include schools, hospitals, and churches.
Keogh Plans
Keogh plans are for self-employed workers. These workers can use the Keogh to establish tax-deferred retirement plans for themselves and their employees. There's a limit to how much of your income you can put into a Keogh plan each year. There's also a limit on the total amount of money you can contribute to the plan.
Pension Plans for Small Businesses
Small businesses can take advantage of two defined contribution plans:
- Simplified Employee Pension (SEP). These plans are designed for small businesses that don't have other pension plans. SEPs are tax-deferred retirement accounts. Business owners put money into their employees' SEP account. The employee then manages the account by investing the money.
- Savings Incentive Match Plans for Employees of Small Employers (SIMPLE). Businesses with 100 or fewer employees can establish SIMPLE plans. Employees put a portion of each paycheck into an Individual Retirement Account (IRA). The employer matches that contribution. Employees then get to decide where to invest the money. They also get to keep their IRA accounts when they change jobs.
For More Information
U.S. Department of Labor
The U.S. Department of Labor Web site features a host of information about defined contribution pensions. For a guide to SIMPLE and SEP plans, see the DOL brochure entitled "Simple Retirement Solutions for Small Business."
URL: http://www.dol.gov
Safeguarding Your Pension Contribution
An anti-fraud campaign conducted by the U.S. Department of Labor (DOL) recently uncovered a small fraction of employers who abuse employee 401(k) contributions. These employers either use this money for corporate purposes or hold on to the money too long. A DOL brochure, entitled "Tips On Tracking Your Contributions" presents 10 warning signs that your pension contributions are being misused. The brochure is available at the DOL Web site.
URL: http://www.dol.gov
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